Pension Litigation Update, August 2012
State Pension Litigation Update
State Budget Solutions released a report in 2011 finding that state pension liabilities represent trillions of dollars of unfunded state debt. The U.S. Census Bureau, Government Accountability Office, Federal Reserve Bank of Cleveland, and Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School detail the long-term chance of failure of the public pension system and the resulting state government fiscal crisis in a May 2012 report. Additional resources are available at the end of this update.
In attempts to reign in the costs of pensions, state lawmakers legislate pension reform. Challengers to those reforms often bring suit, alleging violations of state law, contracts, and the Constitution. Lawsuits also arise regarding the investment of pension funds, involving fiduciary duties of private investment firms as well as oversight liability of governments. As pension reform becomes more crucial to the fiscal solvency of the states, more litigation is inevitable.
RESOURCES & NEWS
- STATE UPDATES: California, Illinois, Rhode Island, New Jersey, Commonwealth of the Northern Mariana Islands
- Public Sector Pensions: How Well Funded Are They, Really..., State Budget Solutions
- Constitutional Contracts Clause Challenges in Public Pension Litigation, by Paul Secunda at Hofstra Law.
- Class Action Law Firms Invade Public Pensions, by Edward Siedle at Forbes
- 6.27.12 Mobile County Circuit Judge James Woods is suing the Retirement Systems of Alabama based on a state law enacted last year that increases the amount that judges must pay toward their pensions from 6% of their salary to 8.5%, claiming that the increase violates a state Constitution prohibition against diminishing a judge's pay during his term of office. The RSA counters that the pension increase is not a pay reduction, but a retirement benefit. PENDING.
- Tonya Denson and members of the Alabama Retirement System v. the Retirement System of Alabama filed 6.17.11
- ISSUE: Whether Retirement Systems of Alabama executives improperly invested billions of dollars in public employees' retirement funds over 15 years by earning lower than average returns in violation of the "prudent man rule," dictating that investments must be consistent with those a prudent man acting in like capacity would make. PENDING in Circuit Court.
- Katie Barnes, et. al. v. Arizona State Retirement System filed 8.11.11
- ISSUE: Whether HB 2264 may constitutionally require public employee contribution increases, effectively implementing a 50/50 contribution scheme between employees and employers. HOLDING: The Maricopa County Superior Court held that the law changing the contribution scheme of pensions unconstitutional, and thus a violation of the state constitution and state statutes.
- Arkansas Teacher Retirement System v. State Street Corporation filed 2.11.12
- ISSUE: Whether State Street Bank violated Massachusetts law by maintaining a foreign exchange practice of inflating foreign exchange purchasing rates and deflating foreign exchange rates when selling currency, affecting the investments of the ATRS pension funds. Class action suit. PENDING in District Court for the District of Massachusetts. Oral arguments scheduled February 24, 2012.
- On July 31, a San Diego superior court judge denied the California Public Employee Relations Board request to put the pension reform plan on hold to consider complaints from unions of unfair labor practices. The measure will take effect when California's Secretary of State certifies the vote next month.
- Governor Brown's 12-point pension reform plan raising the retirement age to 67 and offering hybrid pension schemes failed to get enough Senate votes to become a ballot measure on the November ballot.
- Civil Service Commission Hearing holding 3.16.12
- HOLDING: Jeffrey Baker, a county investment officer, calculated risk beyond allowable limits in two sectors of the $8 billion San Diego County pension fund and was terminated for releasing the information outside of the protocols of the San Diego Employees Retirement Association, a firing upheld by the Commission. Baker responded to the ruling by saying he planned to APPEAL his allegedly illegal firing to Superior Court.
- A 1997 California Court of Appeals ruling held that the Governor cannot delay payments to the pension system to balance the budget because it violates the state employees' contractual right to an actuarially sound retirement system.
- Justus et. al. v. the State of Colorado and PERA filed 3.01.12
- ISSUE: Whether SB1 is unconstitutional because it impairs retirees' contractual right to receive pension benefits as the level promised when employees retired or became eligible to retire. SB1 legislates that COLA drops to the lower of 2% or based on the Consumer Price Index for Urban Wage Earners (CPI-W). COLA could drop to zero if PERA experiences a negative investment return year. DISMISSED by Denver District Court on June 29, 2011 as to the contractual PERA benefits, but PENDING on the non-contractual right to specific COLA benefits. On May 16, 2012, Colorado defendants and PERA defendants filed answer briefs with the Court of Appeals urging further authority and analysis of specific arguments raised by Plaintiffs, including the balancing test used in CO contracts clause cases. On June 15, 2012, Attorneys for Plaintiffs filed the final Reply Brief with the CO Court of Appeals, directly addressing whether a government may fairly impair a contract to which it is a party.
COMMONWEALTH OF THE NORTHERN MARIANA ISLANDS
- Northern Mariana Islands Retirement Fund, Debtor filed 4.17.12
- ISSUE: Whether the Northern Mariana Islands Retirement Fund is a "governmental unit" and therefore not eligible for relief under Chapter 11 of the Bankruptcy Code. As of 7.2.12, a notice regarding fees and expenses of professionals providing services to the debtor in the ordinary course of business was filed. HOLDING: On June 13, 2012, Judge Faris concluded that the fund is a government until, as defined by the Bankruptcy Code, and is therefore ineligible for Chapter 11 relief. The Court focused on whether the fund is an instrumentality of the Commonwealth and concluded that it is because it performs certain functions of the government. "Providing compensation and benefits to government employees is a quintessential government function."
- Office of Connecticut Attorney General: Pension Fund Settlement settled 9.20.04
- FACTS: Then Attorney-General Richard Blumenthal sued Forstmann, Little & Co. for losing $125 million in state pension funds by making investments inconsistent with its contract with the state. HOLDING: On July 1, 2004, a Connecticut Superior jury found that the investment firm repeatedly breached its contract with the state, violated its fiduciary duty, and acted with gross negligence, in bad faith, or with willful misconduct. The jury did not award monetary damages. SETTLEMENT: FL&C agreed to pay the Connecticut Pension Fund $15 million to resolve all issues and return to the fund $1.2 million withheld from the state to cover legal expenses stemming from the suit.
- George Williams et. al., v. Dept. Mgmt. Services and Florida Retirement System filed 6.30.11
- ISSUE: Whether the legislature violated contractual and/or collective bargaining rights when imposed a 3% mandatory employee contribution and eliminating COLA for future services. The lawsuit centers on a 1974 law that halted employee contributions to the retirement system and dictates that the rights of the retirement system are contractual in nature and cannot be altered in any way. HOLDING: 3.6.12 the Circuit Court for the Second Judicial circuit and for Leon County, Florida, granted a motion for summary judgment by Plaintiffs, holding that portions of the SB2100 are unconstitutional as applied to individuals who are members of the FRS prior to July 1, 2011. The government is permanently enjoined from implementing these provisions as applied to these individuals.
- Idaho Education Association v. the state of Idaho and C.L. Butch Otter, Governor filed 9.30.11
- ISSUE: Whether SB1108 violated the Constitution when it effectively impaired existing and contractual obligations to teachers, specifically the IEA, by repealing the Early Retirement Incentive Program for public school educators. HOLDING: Idaho District Judge Hansen ceded that the law caused substantial contractual impairments, but that the Constitution allows for such action when it serves a key public purpose. The state has a significant and legitimate public purpose in imposing the regulation as a means of promoting efficiency and accountability within the public school system. APPEAL: 4.27.12 IEA appealed for declaratory judgment and injunctive relief. See complaint.
- Governor Pat Quinn called lawmakers in for a special session beginning August 17, 2012 to deal with the state's pension funding issues, although Quinn acknowledged that the special session is driven more by fear of a drop in the state's credit rating than a desire to tackle the pension problems.
- Board of Education of Chicago v. Public School Teachers' Pension & Retirement Fund filed January 2005
- ISSUE: Whether the Board of Education violated its legal duty under the Illinois Pension Code submitting a contribution that was $40,635,883 short of the requirement with unilateral authority. PENDING: Currently in procedural battle over whether the Board must redraft its complaint to name all 3,400 teachers as defendants, meaning they must find and serve each one with a copy of the suit. (10.12.11). Oral arguments are scheduled August 2, 2012.
- Kentucky Retirement Systems, et. al., v. EEOC filed 6.19.08
- ISSUE: Whether using age as one factor in retirement plan is arbitrary, thereby rendering the plan discriminatory on its face in violation of the Age Discrimination in Employment Act. HOLDING: The Supreme Court of the United States held in a 5-4 decision that the Kentucky system does not discriminate against workers based on age. The differences in treatment were not motivated by age, but rather by pension status.
- Louisiana Legislative Auditor Pension Report released 3.28.12
- The report considers the likelihood of litigation resulting from the proposed legislation affecting public pension benefits, specifically: 1) increasing the minimum retirement age, 2) increasing employee contributions, 3) increasing the number of years used to calculate final employee average compensation, and 4) the merger of two independent public retirement systems.
- Maine Association of Retirees v. Maine Public Employee Retirement System filed 2.13.12
- ISSUE: Whether the legislature may constitutionally eliminate retired state employees' and public school teachers' COLA for three years and thereafter reduce the adjustments to 3% on the first $20k of a retirees' pension. Prior to the change, the retirement system was authorized to grant COLA of up to 4% per year. PENDING in Maine District Court. MOTION FOR LEAVE TO INTERVENE filed 4.4.12 by Plaintiffs to allow additional plaintiffs to intervene, arguing that participation of additional union-intervenors will help to develop facts. See motion here.
- General Retirement System of Detroit v. the state of Michigan filed 4.18.11
- ISSUE: Whether the Local Government and School District Fiscal Accountability Act Public Act 4 may constitutionally and unilaterally require the municipal government to transfer the assets of the local retirement system to another retirement system for any reason under certain circumstances. PENDING in U.S. District Court Eastern District of Michigan Southern Division.
- Swanson v. PERA filed 6.30.11
- ISSUE: Whether the Minnesota legislature has the authority to amend the pension statutory formula used to calculate and adjust future pension benefits. HOLDING: the Ramsey County District Court rejected the suit, backing the Legislature's policy-making authority, emphasizing that statutes are not contracts absent plain and unambiguous terms that show intent to contract.
- Professional Firefighters of NH, et. al., v. state of New Hampshire filed 2.13.12
- ISSUE: Whether the legislature may withdraw more from the paychecks of veteran public employees to support pension reform. HOLDING: Merrimack County Superior Court held that it is illegal for the legislature to increase contributions for all employees who had worked for at least 10 years. The ruling declared legal the Legislature's ability to affect new hires, including increasing the retirement age and reducing their ability to pad the future pension amounts. At this point, it is unclear whether the Attorney General will appeal.
- Future litigation? Towns across NJ failed to cut hundreds of lawyers and other professionals from the public pension system despite a law passed five years ago requiring them to do so. The improper enrollments could cost the state $1.9 million annually. July 17, 2012.
- Paul DePascale v. state of New Jersey filed 10.18.11
- ISSUE: Whether the state may constitutionally compel judges to pay more towards pension and health benefits as a deduction that comes directly from their salaries. HOLDING: Mercer County Superior Court held that the salary diminishment is unconstitutional, as it is not a tax imposed on all citizens of the state of NJ, but a legislative action in contravention of the Constitution. Specifically, the court noted that while NJ may be facing difficult economic conditions, it couldn't justify violating the portion of the Constitution that does not allow judges' salaries to be reduced during their term.
- New Jersey Education Association et. al., v. state of New Jersey & Chris Christie filed 7.2.11
- ISSUE #1: Whether the NJ legislature impermissibly impaired the obligation of contracts and the right to due process by reducing pension benefits through the suspension of pension adjustments (COLA), increasing contribution of active employees, and increasing contributions of employees with fewer than 20 years of service to pay for medical benefits in retirement. HOLDING: 3.5.12 Defendant's Motion to Dismiss for lack of subject matter jurisdiction is granted. The U.S. District Court New Jersey finds that the court is without subject matter jurisdiction because the Plaintiffs' claims are barred by the Eleventh Amendment, there is no contractual right to any of the disputed items (therefore Contracts Clause claims are dismissed, Due Process claims must be dismissed because they cannot survive rational basis review, and the Plaintiffs' Takings Clause claims must be dismissed because no protectable property interest in dispute items.
- ISSUE #2: Whether the NJ legislature may eliminate COLA increases for future retirees and those already collecting pensions and increase the retirement age by three years. HOLDING: Superior Court Judge Douglas Hurd upheld the NJ legislature's ability to withhold COLA adjustments for retired public employees collecting state pensions.
- In 1993, the New York Court of Appeals ruled that lawmakers violated the state constitution by trying to change the way government pension fund contributions were calculated. The new method was less expensive for the state, but would damage the pension fund's fundamental soundness.
- In re BP, PLC Securities Litigation filed 7.21.10
- ISSUE: Whether British Petroleum ("BP") and its executives made fraudulent statements about the company's safety measures and about the extent of the Gulf of Mexico spill, leading to losses in the states' retirement systems between $181-229.4 million in aggregate BP stock. GRANTED MOTION TO DISMISS: 3.30.12 U.S. District Court for the Southern District of Texas granted BP's motion to dismiss the ERISA stock drop class action lawsuit against BP. The Judge did leave open the possibility that the plaintiffs may refile and adequately allege that the defendants made misrepresentations while acting in a fiduciary capacity and failed to properly monitor other fiduciaries.
- State of Rhode Island and Rhode Island Public Employees' Retiree Coalition, et. al., v. Lincoln Chafee and Gina Raimondo filed June 22, 2012
- ISSUE: Whether the Rhode Island Retirement Security Act violates the state Constitution by suspending COLAs until the pension system is 80% funding and by moving most employees to a hybrid pension plan. The Plaintiffs also allege that State Treasurer, Gina Raimondo, created a "manufactured crisis" in 2011 by dropping the pension fund's investment outlook from 8.25% to 7.5%, sharply raising the contribution made by taxpayers. PENDING in Superior Court by Judge Sarah Taft-Carter.
- In an effort to stop pension reform beginning July 1, 2012, unions sued in Superior Court for a temporary restraining order to suspend the cessation of cost-of-living adjustments, raising of the retirement age, lowering the assumed rate of return on pension funds to 7.5% from 8.25%, and moving state employees onto a hybrid pension benefit plan. HOLDING: Superior Court Judge Sarah Taft-Carter denied the request just hours after unions launched three coordinated lawsuits on behalf of 30,000 state employees, retirees, and emergency responders. APPEAL? Unions may appeal the judge's order, but it is still unclear whether they will pursue a challenge. A court hearing is scheduled for July 16, 2012.
- South Dakota Retirement System v. state of South Dakota filed 4.12.12
- ISSUE: Whether the South Dakota legislature violated the contract between the state and the SDRS when it trimmed the COLA increase for retirees' in the states' public pension plan. HOLDING: Circuit Court Judge Mark Barnett held that the Legislature has the constitutional authority to alter COLA benefits, because there is not a contract guaranteeing unchanged COLA benefits.
- In re Nortel Networks Corp. ERISA Litigation filed 8.10.11
- ISSUE: In a 401k/ESOP class action suit, whether Nortel Network Corp. violated fiduciary duties owed under ERISA to pension plan participants. SETTLEMENT: Related documents available, but specific details of settlement are not available in full.
- Commonwealth of Virginia v. the Bank of New York Mellon Corporation filed 8.11.11
- ISSUE: Whether BNY Mellon made false claims and statements in violation of the Virginia Fraud Against Taxpayers Act, resulting in harm suffered by the Commonwealth of Virginia, the Virginia Retirement System Fund, the Fairfax County and Fairfax County Retirement System Funds and the Arlington County and Arlington County Employees Retirement System Fund. Virginia asked the court for $120 million plus interest in damages. GRANTED MOTION TO DISMISS: BNY won dismissal of VA's lawsuit claiming that the bank defrauded state pension funds through foreign currency transactions.
- Washington Federation of State Employees v. state of Washington & Governor Christine Gregoire filed 10.12.11
- ISSUE: Whether the legislature violated constitutional rights of equal protection and freedom from contract impairment when it ended automatic COLA for retirees in two of Washington's older pension plans in HB 2021. The bill also raised the minimum benefit for older retirees if they meet certain service and year requirements. PENDING in Superior Court in Washington for Thurston County.
- 1972, the Washington State Supreme Court found that the Governor violated the Contracts Clause of the Constitution when he tried to withhold government contributions to the retirement system.
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